Central Bank of Kenya (CBK) data shows the inter-bank rate surged to 6.88%, reaching its highest level since December 10, 2019, when it was recorded at 6.77%.
This has caused a high price of loans exchanged between banks, indicating a new increase in loan costs due to the restricted availability of cash within the banking system.
The inter-bank rate pertains to the interest imposed on brief loans exchanged between banks. Banks engage in borrowing and lending activities within the interbank lending market to maintain their liquidity and comply with regulations like reserve obligations.
Bank regulations mandate that a sufficient level of liquid assets, such as cash, be held by banks to manage potential bank runs by clients. If a bank fails to meet these liquidity requirements, it must borrow money in the inter-bank rate market to make up the shortfall.
However, some lenders have an excess of liquid assets beyond regulatory requirements and will lend money in the inter-bank market to earn interest on these assets. The interest rate charged for interbank borrowing depends on market availability, prevailing rates, and specific contract terms, such as term length.
Recently, there has been a surge in inter-bank lending rates, indicating increased pressure on bank loan charges that have been on the rise due to tightened liquidity in recent months. As a result, the cost of bank loans reached a high rate due to CBK rate hikes and rising yields on government paper.
In response to tightening liquidity, commercial banks have increased interest rates on savings and deposits to pre-pandemic levels to attract wealthy savers who have the option to move their funds to higher-yielding Treasuries and money-market funds.
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